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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

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Form 10-Q

|x                                               | Quarterly report pursuant to   Section 13 or 15(d) of the Securities Exchange Act of 1934 
|----------------------------------------------- | ------------------------------------------------------------------------------------------
|                                                |                                                                                           
|For the quarterly period ended January 31, 2006
|                                                |                                                                                           
|OR                                             
|                                                |                                                                                           
|o                                               | Transition report pursuant to   Section 13 or 15(d) of the Securities Exchange Act of 1934
|                                                |                                                                                           
|Commission File Number:  001-11807             
|                                               
|                                               

UNIFY CORPORATION
(Exact name of registrant as specified in its charter)

|Delaware                                                          |  | 94-2710559                                  
|----------------------------------------------------------------- |  | --------------------------------------------
|(State or other jurisdiction of    incorporation or organization) |  | (I.R.S.   Employer    Identification Number)

|2101 Arena Blvd, Suite 100    Sacramento, California 95834
|----------------------------------------------------------
|(Address   of principal executive offices)                
|                                                          
|Telephone:   (916) 928-6400                               
|(Registrants telephone number, including   area code)    

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

|Yes
x | No
o
|----- | ----

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

|Yes
o | No
x
|----- | ----

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act),

|Yes
o | No
x
|----- | ----

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 29,373,201 shares of Common Stock, $0.001 par value, as of January 31, 2006.

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UNIFY CORPORATION FORM 10-Q

INDEX

|PART I.        | FINANCIAL INFORMATION                                                                                                       | 3 
|-------------- | --------------------------------------------------------------------------------------------------------------------------- | --
|               |                                                                                                                             |   
|Item 1.        | Financial Statements                                                                                                        | 3 
|               |                                                                                                                             |   
|               | Condensed Consolidated Balance Sheets as of   January 31, 2006 and April 30, 2005                                           | 3 
|               |                                                                                                                             |   
|               | Unaudited Condensed   Consolidated Statements of Operations for the three and nine months ended   January 31, 2006 and 2005 | 4 
|               |                                                                                                                             |   
|               | Unaudited Condensed   Consolidated Statements of Cash Flows for the nine months ended January 31,   2006 and 2005           | 5 
|               |                                                                                                                             |   
|               | Notes to Unaudited Condensed Consolidated   Financial Statements                                                            | 6 
|               |                                                                                                                             |   
|Item 2.        | Managements Discussion and Analysis of   Financial Condition and Results of Operations                                     | 13
|               |                                                                                                                             |   
|Item 3.        | Quantitative and Qualitative Disclosures   about Market Risk                                                                | 18
|               |                                                                                                                             |   
|Item 4.        | Controls and Procedures                                                                                                     | 19
|               |                                                                                                                             |   
|PART II.       | OTHER INFORMATION                                                                                                           | 20
|               |                                                                                                                             |   
|Item 1.        | Legal Proceedings                                                                                                           | 20
|               |                                                                                                                             |   
|Item 6.        | Exhibits                                                                                                                    | 21
|               |                                                                                                                             |   
|SIGNATURE      | 22                                                                                                                         
|               |                                                                                                                             |   
|CERTIFICATIONS |                                                                                                                            

2



PART I.  FINANCIAL INFORMATION

Item 1.    Financial Statements

UNIFY CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(In thousands)

|                                                              |  | January   31,    2006 |         | April 30,    2005 |          
|------------------------------------------------------------- |  | --------------------- | ------- | ----------------- | ---------
|                                                              |  |                       |         |                   |          
|                                                              |  | (unaudited)           |         |                   | (audited)
|ASSETS                                                        |  |                       |         |                   |          
|Current assets:                                               |  |                       |         |                   |          
|Cash   and cash equivalents                                   |  | $                     | 2,729   |                   | $        
|Accounts   receivable, net                                    |  |                       | 2,674   |                   |          
|Prepaid   expenses & other current assets                     |  |                       | 502     |                   |          
|Contracts   in progress                                       |  |                       | 116     |                   |          
|                                                              |  |                       |         |                   |          
|Total   current assets                                        |  |                       | 6,021   |                   |          
|Property and equipment,   net                                 |  |                       | 301     |                   |          
|Other investments                                             |  |                       | 214     |                   |          
|Goodwill and intangible   assets, net                         |  |                       | 1,648   |                   |          
|Other assets, net                                             |  |                       | 198     |                   |          
|                                                              |  |                       |         |                   |          
|Total   assets                                                |  | $                     | 8,382   |                   | $        
|                                                              |  |                       |         |                   |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                          |  |                       |         |                   |          
|Current liabilities:                                          |  |                       |         |                   |          
|Accounts   payable                                            |  | $                     | 161     |                   | $        
|Short-term   borrowings and current portion of long-term debt |  |                       | 812     |                   |          
|Other   accrued liabilities                                   |  |                       | 724     |                   |          
|Accrued   compensation and related expenses                   |  |                       | 598     |                   |          
|Deferred   revenue                                            |  |                       | 3,365   |                   |          
|                                                              |  |                       |         |                   |          
|Total   current liabilities                                   |  |                       | 5,660   |                   |          
|Other long-term   liabilities                                 |  |                       | 700     |                   |          
|Commitments and   contingencies                               |  |                       |        |                   |          
|Stockholders equity:                                         |  |                       |         |                   |          
|Common   stock                                                |  |                       | 29      |                   |          
|Additional   paid-in capital                                  |  |                       | 63,886  |                   |          
|Accumulated   other comprehensive income                      |  |                       | 24      |                   |          
|Accumulated   deficit                                         |  |                       | (61,917 | )                 |          
|                                                              |  |                       |         |                   |          
|Total   stockholders equity                                  |  |                       | 2,022   |                   |          
|                                                              |  |                       |         |                   |          
|Total   liabilities and stockholders equity                  |  | $                     | 8,382   |                   | $        
|                                                              |  |                       |         |                   |          

See accompanying notes to condensed consolidated financial statements.

3



UNIFY CORPORATIONUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)

|                                               |  | Three   Months Ended
January 31, |        | Nine   Months Ended
January 31, |  
|---------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | -
|                                               |  |                                  |        |                                 |  
|                                               |  | 2006                             |        | 2005                            |  
|                                               |  |                                  |        |                                 |  
|Revenues:                                      |  |                                  |        |                                 |  
|Software   licenses                            |  | $                                | 1,029  |                                 | $
|Services                                       |  |                                  | 1,393  |                                 |  
|                                               |  |                                  |        |                                 |  
|Total   revenues                               |  |                                  | 2,422  |                                 |  
|                                               |  |                                  |        |                                 |  
|Cost of   Revenues:                            |  |                                  |        |                                 |  
|Software   licenses                            |  |                                  | 95     |                                 |  
|Services                                       |  |                                  | 634    |                                 |  
|                                               |  |                                  |        |                                 |  
|Total cost   of revenues                       |  |                                  | 729    |                                 |  
|                                               |  |                                  |        |                                 |  
|Gross profit                                   |  |                                  | 1,693  |                                 |  
|                                               |  |                                  |        |                                 |  
|Operating   Expenses:                          |  |                                  |        |                                 |  
|Product   development                          |  |                                  | 755    |                                 |  
|Selling,   general and administrative          |  |                                  | 1,641  |                                 |  
|                                               |  |                                  |        |                                 |  
|Total   operating expenses                     |  |                                  | 2,396  |                                 |  
|                                               |  |                                  |        |                                 |  
|Loss from   operations                         |  |                                  | (703   | )                               |  
|Other   income, net                            |  |                                  | 15     |                                 |  
|                                               |  |                                  |        |                                 |  
|Loss before   income taxes                     |  |                                  | (688   | )                               |  
|Provision   for income taxes                   |  |                                  |       |                                 |  
|                                               |  |                                  |        |                                 |  
|Net loss                                       |  | $                                | (688   | )                               | $
|                                               |  |                                  |        |                                 |  
|Net loss per   share:                          |  |                                  |        |                                 |  
|Basic                                          |  | $                                | (0.02  | )                               | $
|Dilutive                                       |  | $                                | (0.02  | )                               | $
|                                               |  |                                  |        |                                 |  
|Shares used   in computing net loss per share: |  |                                  |        |                                 |  
|Basic                                          |  |                                  | 29,148 |                                 |  
|Dilutive                                       |  |                                  | 29,148 |                                 |  
|                                               |  |                                  |        |                                 |  
|                                               |  |                                  |        |                                 |  

See accompanying notes to condensed consolidated financial statements.

4



UNIFY CORPORATIONUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)

|                                                                       |  | Nine   Months Ended    January 31, |       
|---------------------------------------------------------------------- |  | ---------------------------------- | ------
|                                                                       |  |                                    |       
|                                                                       |  | 2006                               |       
|                                                                       |  |                                    |       
|Cash flows   from operating activities:                                |  |                                    |       
|Net loss                                                               |  | $                                  | (795  
|Reconciliation   of net loss to net cash used in operating activities: |  |                                    |       
|Depreciation                                                           |  |                                    | 148   
|Loss on   disposal of equipment                                        |  |                                    | 17    
|Amortization                                                           |  |                                    | 101   
|Fulfillment of   support obligations                                   |  |                                    | (158  
|Employee stock   based expense                                         |  |                                    | 120   
|Stock based   expense for acquisition earn-out payment                 |  |                                    | 122   
|Changes in   operating assets and liabilities:                         |  |                                    |       
|Accounts   receivable                                                  |  |                                    | (153  
|Prepaid   expenses and other current assets                            |  |                                    | 135   
|Contracts in   progress                                                |  |                                    | (116  
|Accounts   payable                                                     |  |                                    | (578  
|Accrued   compensation and related expenses                            |  |                                    | (112  
|Other accrued   liabilities                                            |  |                                    | (449  
|Deferred   revenue                                                     |  |                                    | 183   
|                                                                       |  |                                    |       
|Net cash used   in operating activities                                |  |                                    | (1,535
|                                                                       |  |                                    |       
|Cash flows   from investing activities:                                |  |                                    |       
|Purchases of   property and equipment                                  |  |                                    | (38   
|Decrease in   other assets                                             |  |                                    |      
|                                                                       |  |                                    |       
|Net cash used   in investing activities                                |  |                                    | (38   
|                                                                       |  |                                    |       
|Cash flows   from financing activities:                                |  |                                    |       
|Proceeds from   issuance of common stock, net                          |  |                                    | 57    
|Borrowings/payments   under line of credit, net                        |  |                                    | 675   
|Borrowings   under debt obligations                                    |  |                                    | 144   
|Principal   payments under debt obligations                            |  |                                    | (200  
|                                                                       |  |                                    |       
|Net cash   provided by financing activities                            |  |                                    | 676   
|                                                                       |  |                                    |       
|Effect of   exchange rate changes on cash                              |  |                                    | (49   
|                                                                       |  |                                    |       
|Net decrease   in cash and cash equivalents                            |  |                                    | (946  
|Cash and cash   equivalents, beginning of period                       |  |                                    | 3,675 
|                                                                       |  |                                    |       
|Cash and cash   equivalents, end of period                             |  | $                                  | 2,729 
|                                                                       |  |                                    |       
|Supplemental   cash flow information:                                  |  |                                    |       
|Cash received   during the period for:                                 |  |                                    |       
|Interest                                                               |  | $                                  | 84    
|Income taxes                                                           |  | $                                  |      

See accompanying notes to condensed consolidated financial statements.

5



UNIFY CORPORATIONNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.     Basis of Presentation

The condensed consolidated financial statements have been prepared by Unify Corporation (the Company, we, us, our) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). While the interim financial information contained in this filing is unaudited, such financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair presentation. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto, together with Managements Discussion and Analysis of Financial Condition and Results of Operations, which are included in the Companys Annual Report on Form 10-K for the fiscal year
ended April 30, 2005 as filed with the SEC.

Revenue Recognition

The Company generates revenue from software license sales and related services, including maintenance and support, and consulting services. The Company licenses its products to end user customers, independent software vendors (ISVs), international distributors and value added resellers (VARs).  The Companys contracts with ISVs, VARs and international distributors do not include special considerations such as rights of return, stock rotation, price protection, special acceptance or warranty provisions.  With the exception of its NavRisk product, the Company recognizes revenue for software license sales in accordance with Statement of Position 97-2, Software Revenue Recognition.  For the NavRisk product, the Company recognizes revenue for software licenses sales in accordance with Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts and
Accounting Research Bulletin (ARB) 45, Long-Term Construction Type Contracts.  The Company exercises judgment in connection with the determination of the amount of software and services revenue to be recognized in each accounting period.  The nature of each licensing arrangement determines how revenues and related costs are recognized.

With the exception of the NavRisk software application, the Companys products are generally sold with a perpetual license.  The Company sells the NavRisk software under both perpetual and term licenses.  Term licenses allow the customer to use the NavRisk software for a fixed period of time, generally 3 to 5 years, and at the conclusion of the term the customer must cease using the software or purchase a new license term.  The customer does not receive any additional software during the license term.  Under both perpetual and term licenses the customer can, at their discretion, elect to purchase related maintenance and support on an annual basis.

For software license arrangements that do not require significant modification or customization of the underlying software, revenue is recognized when the software product or service has been shipped or electronically delivered, the license fees are fixed and determinable, uncertainties regarding customer acceptance are resolved, collectibility is probable and persuasive evidence of an arrangement exists.

For arrangements of $10,000 or more a signed noncancelable license agreement is required for revenue recognition.  For arrangements that are less than $10,000 the Company considers a customer purchase order, a customer purchase requisition, or a sales quotation signed by an officer of the customer to be persuasive evidence that an arrangement exits such that revenue can be recognized.

For software license arrangements that do require significant modification or customization of the underlying software, revenue is recognized based on contract accounting under the provisions of Accounting Research Bulletin (ARB) 45, Long-Term Construction Type Contracts and Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.  This guidance is followed since contracts with customers purchasing the NavRisk application require significant configuration to the software and the configuration activities are essential to the functionality of the software.  The Company is using the completed-contract method for revenue recognition as it has limited experience determining the accuracy of progress-to-completion estimates for installation hours and project milestones.  Under the completed-contract method, revenue is recognized when the software
product or service has been shipped or electronically delivered, the license fees are fixed and determinable, uncertainties regarding customer acceptance are resolved, collectibility is probable and persuasive evidence of an arrangement exists.  Project costs incurred for contracts in progress are deferred and reflected on the Balance Sheet as Contracts in Progress.  When a contract is completed, revenue is recognized and deferred costs are expensed.  The Company anticipates it will switch to the percentage-of-completion method to recognize NavRisk revenue when it is capable of accurately establishing progress-to-completion estimates for the NavRisk contracts.

The Companys customer contracts include multi-element arrangements that include a delivered element (a software license) and undelivered elements (such as maintenance and support and/or consulting). The value allocated to the undelivered elements is unbundled from the delivered element based on vendor-specific objective evidence (VSOE) of the fair value of the maintenance and

6



support and/or consulting, regardless of any separate prices stated within the contract. VSOE of fair value is defined as (i) the price charged when the same element is sold separately, or (ii) if the element has not yet been sold separately, the price for the element established by management having the relevant authority when it is probable that the price will not change before the introduction of the element into the marketplace.  The Company then allocates the remaining balance to the delivered element (a software license) regardless of any separate prices stated within the contract using the residual method as the fair value of all undelivered elements is determinable.

We defer revenue for any undelivered elements, and recognize revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding customer acceptance are resolved, and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements.  If we cannot objectively determine the fair value of any undelivered element included in bundled software and service arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.

An assessment of the ability of the Companys customers to pay is another consideration that affects revenue recognition.  In some cases, the Company sells to undercapitalized customers.  In those circumstances, revenue recognition is deferred until cash is received, the customer has established a history of making timely payments or the customers financial condition has improved.  Furthermore, once revenue has been recognized, the Company evaluates the related accounts receivable balance at each period end for amounts that we believe may no longer be collectible.  This evaluation is largely done based on a review of the financial condition via credit agencies and historical experience with the customer.  Any deterioration in credit worthiness of a customer may impact the Companys evaluation of accounts receivable in any given period.

Revenue from support and maintenance activities, which consist of fees for ongoing support and unspecified product updates, are recognized ratably over the term of the maintenance contract, typically one year, and the associated costs are expensed as incurred.  Consulting service arrangements are performed on a best efforts basis and are generally billed under time-and-materials arrangements.  Revenues and expenses relating to providing consulting services are recognized as the services are performed.

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123R, Share-Based Payment. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily with respect to transactions in which employee services are obtained in exchange for share-based payment. Statement 123R is effective as of the beginning of the first fiscal year that begins after June 15, 2005. We have not completed the process of evaluating the impact that will result from adopting this pronouncement. The Company is therefore unable to disclose the impact that adopting FASB Statement 123R will have on its financial position and the results of operations when such statement is adopted.

In December 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. This statement addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. Provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and were required to be adopted by the Company in the second quarter of fiscal 2006. The adoption of Statement 153 did not have a material impact on our financial position, cash flows or results of operations.

In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections  a replacement of APB No. 20 and FAS No. 3.  SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally
applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS No. 154. SFAS No. 154 is required to be adopted in fiscal years beginning after December 15, 2005. We do not expect the adoption of this accounting pronouncement to have a material impact on our financial position, cash flows or results of operations.

2.     Stock Compensation Information

As permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123) and Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (SFAS 148), the Company accounts for stock-based awards using the intrinsic value method of accounting in accordance with Accounting

7



Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. As such, compensation is recorded on the measurement date, generally the date of issuance or grant, as the excess of the current estimated fair value of the underlying stock over the purchase or exercise price. Any deferred compensation is amortized over the respective vesting periods of the equity instruments, if any.

SFAS 123 requires the disclosure of pro
forma net income (loss) and net income (loss) per share had the Company adopted
the fair value method to account for its stock-based awards. Under SFAS 123,
the fair value of stock-based awards to employees is calculated through the use
of option pricing models which were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions. Such
options differ significantly from the Companys stock-based awards. These
models greatly affect the calculated values. The Companys calculations are
made using the Black-Scholes option pricing model, with the following weighted
average assumptions for the three months ended January 31, 2006 and 2005,
respectively: expected option life, 12 months following vesting; stock
volatility of 233% and 183%; risk-free interest rates of 4.4% and 3.4%; and
no dividends during the expected term and for the nine months ended January 31,
2006 and 2005, respectively; expected option life, 12 months following vesting;
stock volatility of 222% and 218%, and risk-free interest rates of 4.1% and
3.2%.  The Companys calculations are based on a multiple option
valuation approach and forfeitures are recognized as they occur.

The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS 123, to stock-based employee compensation (in thousands, except per share data):

|                                                                                                      |  | Three Months EndedJanuary 31, |       | Nine Months EndedJanuary   31, |  
|----------------------------------------------------------------------------------------------------- |  | ----------------------------- | ----- | ------------------------------ | -
|                                                                                                      |  |                               |       |                                |  
|                                                                                                      |  | 2006                          |       | 2005                           |  
|                                                                                                      |  |                               |       |                                |  
|Net   loss as reported                                                                                |  | $                             | (688  | )                              | $
|Add: stock-based employee   compensation included  in reported net loss                               |  |                               | 120   |                                |  
|Less: stock-based employee compensation expense,    determined under fair value method for all awards |  |                               | (24   | )                              |  
|                                                                                                      |  |                               |       |                                |  
|Pro forma   net loss                                                                                  |  | $                             | (592  | )                              | $
|                                                                                                      |  |                               |       |                                |  
|Net   loss per share (basic and diluted), as reported                                                 |  | $                             | (0.02 | )                              | $
|Net   loss per share (basic and diluted), pro forma                                                   |  | $                             | (0.02 | )                              | $

8



3.     Goodwill and Intangible Assets

The following tables present details of the Companys goodwill and intangible assets as of January 31, 2006 and April 30, 2005 (in thousands):

|January   31, 2006 |  | Grosscarryingamount  |       | Accumulated amortization |   | Netcarryingamount  |   | Estimated  useful   life |      
|------------------ |  | -------------------- | ----- | ------------------------ | - | ------------------ | - | ------------------------ | -----
|                   |  |                      |       |                          |   |                    |   |                          |      
|Infinite Lives:    |  |                      |       |                          |   |                    |   |                          |      
|Goodwill           |  | $                    | 1,405 |                          | $ |                   |   | $                        | 1,405
|Finite Lives:      |  |                      |       |                          |   |                    |   |                          |      
|Technology-based   |  |                      | 200   |                          |   | (67                | ) |                          | 133  
|Customer-related   |  |                      | 164   |                          |   | (54                | ) |                          | 110  
|                   |  |                      |       |                          |   |                    |   |                          |      
|Total              |  | $                    | 1,769 |                          | $ | (121               | ) | $                        | 1,648
|                   |  |                      |       |                          |   |                    |   |                          |      
|                   |  |                      |       |                          |   |                    |   |                          |      
|April 30, 2005     |  | Gross carryingamount |       | Accumulatedamortization  |   | Net carryingamount |   | Estimated useful   life  |      
|                   |  |                      |       |                          |   |                    |   |                          |      
|Infinite Lives:    |  |                      |       |                          |   |                    |   |                          |      
|Goodwill           |  | $                    | 1,405 |                          | $ |                   |   | $                        | 1,405
|Finite Lives:      |  |                      |       |                          |   |                    |   |                          |      
|Technology-based   |  |                      | 200   |                          |   | (16                | ) |                          | 184  
|Customer-related   |  |                      | 164   |                          |   | (14                | ) |                          | 150  
|                   |  |                      |       |                          |   |                    |   |                          |      
|Total              |  | $                    | 1,769 |                          | $ | (30                | ) | $                        | 1,739
|                   |  |                      |       |                          |   |                    |   |                          |      

Acquired finite-lived intangibles are generally amortized on a straight line basis over their estimated useful life. Intangible assets amortization expense for the three months and nine months ended January 31, 2006 was $31,000 and $91,000, respectively. The estimated future amortization expense related to intangible assets as of January 31, 2006 is as follows (in thousands):

|FYE
April 30,                   |  | Amount |    
|------------------------------- |  | ------ | ---
|                                |  |        |    
|2006 (remaining three   months) |  | $      | 31 
|2007                            |  |        | 121
|2008                            |  |        | 91 
|                                |  |        |    
|Total                           |  | $      | 243
|                                |  |        |    

Goodwill will be tested for impairment on an annual basis as of April 30, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach in accordance with FASB 142, Goodwill and Other Intangible Assets.

4.     Credit Facility

On June 5, 2005, the Company renewed its loan agreement with the Silicon Valley Bank. The agreement provides for a $1.0 million revolving line of credit and for term loans up to $250,000 for the purchase of qualifying equipment. The line of credit is secured by qualifying domestic accounts receivable and has a one-year term. The term loan is secured by purchased assets and is repaid over twenty four months. The Company will incur interest expense on the line of credit and the term loan at the prevailing prime rate plus 2.0% and 2.5% per annum, respectively. The prime rate used to determine the interest shall not be less than 4.0%. As of January 31, 2006, the Company had $675,000 outstanding under the line of credit (see Note 5) and $0.2 million in available credit based upon eligible assets at that date. Additionally, as of January 31, 2006 the Company had $34,000 outstanding in term loans (see Note 5).

9



5.     Borrowings

Borrowings consisted of the following at January 31, 2006 and April 30, 2005 (in thousands):

|                                                                                                                                                                                                                                      |  | January   31,
2006 |      | April 30,
2005 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---- | -------------- | -
|                                                                                                                                                                                                                                      |  |                    |      |                |  
|Unsecured note payable to   a related party, bears no interest                                                                                                                                                                        |  | $                  |     |                | $
|Note payable, bears no   interest, payable in installments through March 15, 2006                                                                                                                                                     |  |                    | 96   |                |  
|Notes payable to a financial institution, accruing   interest at prime plus 2.5%, not to be  less than 4% per annum (actual   interest rate at January 31, 2006 was 9.75%),  payable in monthly   installments through September 2006 |  |                    | 34   |                |  
|Short-term borrowings, accruing interest at prime plus   2.0%, not to be  less than 4% per annum (actual interest rate at January   31, 2006 was 9.25%),  payable in full by June 5, 2006                                             |  |                    | 675  |                |  
|Capital lease payable,   payable in monthly installments through August 2007                                                                                                                                                          |  |                    | 12   |                |  
|                                                                                                                                                                                                                                      |  |                    |      |                |  
|                                                                                                                                                                                                                                      |  |                    | 817  |                |  
|Less current portion                                                                                                                                                                                                                  |  |                    | (812 | )              |  
|                                                                                                                                                                                                                                      |  |                    |      |                |  
|                                                                                                                                                                                                                                      |  | $                  | 5    |                | $
|                                                                                                                                                                                                                                      |  |                    |      |                |  

6.     Other Long-Term Liabilities

In February 2005, the Company acquired all of the issued and outstanding equity securities of Acuitrek, Inc. As part of the Acuitrek acquisition, the Company assumed a royalty payable of $600,000 as established by the 2001 funded software development and license arrangement with Acuitreks first customer. A minimum royalty is payable in quarterly installments equal to two percent of all gross revenues received from the sale or licensing of the NavRisk product through June 11, 2011. Any remaining royalty balance as of June 11, 2011 shall become fully due and payable on such date. The Company accrued the estimated costs of providing future support and maintenance services for the support and maintenance contracts as of the acquisition date. The future support obligation periods ranged from less than a year to greater than twenty (20) additional years. The support obligation for periods greater than one year from January 31, 2006 is
$121,000.

The Companys other long-term liabilities consist of the following at January 31, 2006 and April 30, 2005 (in thousands):

|                                         |  | January   31,
2006 |     | April 30,
2005 |  
|---------------------------------------- |  | ------------------ | --- | -------------- | -
|                                         |  |                    |     |                |  
|Long-term debt, net of   current portion |  | $                  | 5   |                | $
|Royalty payable                          |  |                    | 506 |                |  
|Accrued support   obligations            |  |                    | 121 |                |  
|Other long-term   liabilities            |  |                    | 68  |                |  
|                                         |  |                    |     |                |  
|                                         |  | $                  | 700 |                | $
|                                         |  |                    |     |                |  

In France, the Company is subject to mandatory employee severance costs associated with a statutory government regulated plan covering all employees. The plan provides for one month of severance for the first five years of service with an employer and one fifth of one year of severance for every one year of service thereafter. In order to receive their severance payment the employee may not retire before age 65 and must be employed at the time of retirement.

7.     Maintenance Contracts

The Company offers maintenance contracts to its customers at the time they enter into a product license agreement and renew those contracts, generally at the customers option, annually thereafter. These maintenance contracts are generally priced as a percentage of the value of the related license agreement. The specific terms and conditions of these initial maintenance contracts and subsequent renewals vary depending upon the product licensed and the country in which the Company does business. Generally, maintenance contracts provide the customer with unspecified product maintenance updates and customer support services. Revenue from maintenance contracts is initially deferred and then recognized ratably over the term of the agreements.

10



Changes in the Companys deferred maintenance revenue during the periods are as follows (in thousands):

|                                      |  | Three Months Ended
January   31, |        | Nine Months Ended
January   31, |  
|------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | -
|                                      |  |                                  |        |                                 |  
|                                      |  | 2006                             |        | 2005                            |  
|                                      |  |                                  |        |                                 |  
|Balances, beginning of   period       |  | $                                | 1,888  |                                 | $
|Amount recognized during   the period |  |                                  | (1,304 | )                               |  
|Amount of new maintenance   contracts |  |                                  | 2,398  |                                 |  
|                                      |  |                                  |        |                                 |  
|Balances, end of period               |  | $                                | 2,982  |                                 | $
|                                      |  |                                  |        |                                 |  

8.     Comprehensive Loss

The Companys total comprehensive loss for the periods shown was as follows:

|                                    |  | Three   Months Ended    January 31, |      | Nine   Months Ended    January 31 |  
|----------------------------------- |  | ----------------------------------- | ---- | --------------------------------- | -
|                                    |  |                                     |      |                                   |  
|                                    |  | 2006                                |      | 2005                              |  
|                                    |  |                                     |      |                                   |  
|Net loss                            |  | $                                   | (688 | )                                 | $
|Foreign currency   translation gain |  |                                     | (2   | )                                 |  
|                                    |  |                                     |      |                                   |  
|Total   comprehensive loss          |  | $                                   | (690 | )                                 | $
|                                    |  |                                     |      |                                   |  

9.     Earnings (Loss) Per Share

SFAS No. 128, Earnings per Share, requires a dual presentation of basic and diluted income per share (EPS). Basic EPS excludes dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (e.g. convertible preferred stock, warrants, and common stock options) were exercised or converted into common stock. Potential common shares in the diluted EPS computation are excluded for the three-month and nine-month periods ended January 31, 2006 and January 31, 2005 as their effect would be antidilutive. The following is a reconciliation of the numerators and denominators of the basic and diluted income per share computations for the periods indicated (in thousands, except per share data):

|                                                               |  | Three Months Ended
January 31, |        | Nine Months Ended
January 31, |  
|-------------------------------------------------------------- |  | ------------------------------ | ------ | ----------------------------- | -
|                                                               |  |                                |        |                               |  
|                                                               |  | 2006                           |        | 2005                          |  
|                                                               |  |                                |        |                               |  
|Net loss   (Numerator):                                        |  |                                |        |                               |  
|Net loss                                                       |  | $                              | (688   | )                             | $
|                                                               |  |                                |        |                               |  
|Shares   (Denominator):                                        |  |                                |        |                               |  
|Weighted average shares of   common stock outstanding, basic   |  |                                | 29,148 |                               |  
|Weighted average common   equivalent shares outstanding        |  |                                |       |                               |  
|                                                               |  |                                |        |                               |  
|Weighted average shares of   common stock outstanding, diluted |  |                                | 29,148 |                               |  
|                                                               |  |                                |        |                               |  
|Per Share   Amount:                                            |  |                                |        |                               |  
|Net loss per share, basic                                      |  | $                              | (0.02  | )                             | $
|Effect of dilutive   securities                                |  |                                |       |                               |  
|                                                               |  |                                |        |                               |  
|Net loss per share,   diluted                                  |  | $                              | (0.02  | )                             | $
|                                                               |  |                                |        |                               |  

11



10.     Segment Information

In the fourth quarter of fiscal 2005, the Company acquired Acuitrek, Inc. This segment is now known as the Insurance Risk Management division (IRM), which sells and markets the NavRisk application. The Companys technology products, including the Unify NXJ, Dataserver, VISION and ACCELL product families, are included in the Unify Business Solutions (UBS) segment.

Financial information for the Companys reportable segments is summarized below (in thousands):

|                                     |  |                                     |       |                                    |   |       |   |      |        |   |   |        |  
|------------------------------------ |  | ----------------------------------- | ----- | ---------------------------------- | - | ----- | - | ---- | ------ | - | - | ------ | -
|                                     |  | Three   Months Ended    January 31, |       | Nine   Months Ended    January 31, |  
|                                     |  |                                     |       |                                    |  
|                                     |  | 2006                                |       | 2005                               |   | 2006  |   | 2005 |       
|                                     |  |                                     |       |                                    |   |       |   |      |        |   |   |        |  
|Total net revenues:                  |  |                                     |       |                                    |   |       |   |      |        |   |   |        |  
|UBS-Americas                         |  | $                                   | 1,403 |                                    | $ | 1,954 |   | $    | 4,829  |   | $ | 5,724  |  
|UBS-Europe                           |  |                                     | 702   |                                    |   | 1,033 |   |      | 2,201  |   |   | 2,806  |  
|Insurance Risk Management   Division |  |                                     | 317   |                                    |   |      |   |      | 779    |   |   |       |  
|                                     |  |                                     |       |                                    |   |       |   |      |        |   |   |        |  
|Total   net revenues                 |  | $                                   | 2,422 |                                    | $ | 2,987 |   | $    | 7,809  |   | $ | 8,530  |  
|                                     |  |                                     |       |                                    |   |       |   |      |        |   |   |        |  
|Operating Income (loss):             |  |                                     |       |                                    |   |       |   |      |        |   |   |        |  
|UBS-Americas                         |  | $                                   | 82    |                                    | $ | (220  | ) | $    | 258    |   | $ | (1,223 | )
|UBS-Europe                           |  |                                     | (58   | )                                  |   | (462  | ) |      | 215    |   |   | (564   | )
|Insurance   Risk Management Division |  |                                     | (727  | )                                  |   |      |   |      | (1,292 | ) |   |       |  
|                                     |  |                                     |       |                                    |   |       |   |      |        |   |   |        |  
|Total operating loss                 |  | $                                   | (703  | )                                  | $ | (682  | ) | $    | (819   | ) | $ | (1,787 | )
|                                     |  |                                     |       |                                    |   |       |   |      |        |   |   |        |  
|Interest income                      |  | $                                   | 33    |                                    | $ | 14    |   | $    | 92     |   | $ | 41     |  
|                                     |  |                                     |       |                                    |   |       |   |      |        |   |   |        |  
|Interest expense                     |  | $                                   | 3     |                                    | $ | 6     |   | $    | 8      |   | $ | 18     |  
|                                     |  |                                     |       |                                    |   |       |   |      |        |   |   |        |  

Net revenues by geographic area were as follows (in thousands):

|                                          |  | Three   Months Ended    January 31 |       | Nine   Months Ended    January 31 |  
|----------------------------------------- |  | ---------------------------------- | ----- | --------------------------------- | -
|                                          |  |                                    |       |                                   |  
|                                          |  |                                    | 2006  |                                   |  
|                                          |  |                                    |       |                                   |  
|Total net revenues:                       |  |                                    |       |                                   |  
|Americas                                  |  | $                                  | 796   |                                   | $
|International   Distributors              |  |                                    | 335   |                                   |  
|Central   Europe-Germany, Benelux, Others |  |                                    | 272   |                                   |  
|United   Kingdom                          |  |                                    | 270   |                                   |  
|France                                    |  |                                    | 432   |                                   |  
|Insurance   Risk Management Division      |  |                                    | 317   |                                   |  
|                                          |  |                                    |       |                                   |  
|Total net revenues                        |  | $                                  | 2,422 |                                   | $
|                                          |  |                                    |       |                                   |  

11.     Subsequent Event

On March 14, 2006, the Company entered into an Agreement and Plan of Merger with Warp Technology Holdings, Inc (Warp).  Warp is a holding company that operates under the name Halo Technology Holdings, Inc.  Under the terms of the merger agreement Halo would acquire all of the outstanding stock of Unify as part of an all stock transaction. Unify stockholders will receive 0.437 shares of Halo common stock for every share of Unify common stock.

12



UNIFY CORPORATION

Item 2.   Managements Discussion and Analysis of Financial Condition and Results of Operations

The discussion in this Quarterly Report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about the software industry and certain assumptions made by the Companys management. Words such as anticipates, expects, intends, plans, believes, seeks, estimates, variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include, but are
not limited to, those set forth herein under Volatility of Stock Price and General Risk Factors Affecting Quarterly Results and in the Companys Annual Report on Form 10-K under Business  Risk Factors. Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents the Company files from time to time with the SEC, particularly the Companys Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

The following discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the audited Consolidated Financial Statements and Notes thereto, together with Managements Discussion and Analysis of Financial Condition and Results of Operations, which are included in the Companys Annual Report on Form 10-K for the fiscal year ended April 30, 2005, as filed with the SEC.

Overview

Unify (the Company, we, us or our) provides business process automation software solutions, including market leading applications for specialty markets within the insurance risk management and transportation industries. Our solutions deliver a broad set of capabilities for automating business processes, integrating existing information systems and delivering collaborative information. Through our industry expertise and technologies, we help organizations reduce risk, drive business optimization, apply governance standards and increase customer and member services.

On March 14, 2006, the Company entered into an Agreement and Plan of Merger with Warp Technology Holdings, Inc (Warp).  Warp is a holding company for established enterprise software companies and operates under the name Halo Technology Holdings, Inc.  Under the terms of the merger agreement Halo would acquire all of the outstanding stock of Unify as part of an all stock transaction. Unify stockholders will receive 0.437 shares of Halo common stock for every share of Unify common stock.

In February 2005, we acquired privately-held Acuitrek Inc., a provider of policy administration and underwriting solutions for the alternative risk market. The acquisition was the result of our expanded strategy to penetrate underserved specialty markets with our solutions. As a result, Unify now offers solutions to the alternative risk market, in particular public entity risk pools made up of cities, counties, special districts, third party administrators and insurance carriers that administer self insurance funds for public entities, captives and other self-insured groups.

Our products include vertical application software solutions for the alternative risk insurance and transportation management markets and also infrastructure and database software that helps our customers build business processes. Our products enable organizations to rapidly, efficiently and seamlessly deliver the right information to the right people at the right time. By consolidating, automating and managing data, our customers see increases in efficiencies and services, as well as reductions in costs.

Our customers also include risk pools, corporate information technology departments (IT), software value-added resellers (VARs), solutions integrators (SIs) and independent software vendors (ISVs) from a variety of industries, including insurance, financial services, healthcare, government, manufacturing and many other industries. We are headquartered in Sacramento, California, with a subsidiary office in Paris, France and a sales office in the United Kingdom (UK). We market and sell products directly in the United States, UK and France and indirectly through worldwide distributors in Japan, Russia, South Africa, Italy, Australia, Brazil and Latin America with customers in more than 45 countries.

Our mission is to deliver applications and infrastructure technology solutions that give customers transactional efficiency, a rich user experience and quality information cost effectively and with a high degree of customer satisfaction. Our strategy is to leverage our award-winning process automation technology with our vertical applications to deliver a broad set of solutions that streamline and automate processes and workflow; present rich user experiences; and deliver consolidated information from multiple sources. We believe that by integrating our technology and applications, we have created a unique and compelling offering in our marketplace. By combining best-of-breed capabilities, we offer customers a better way to manage, integrate, view and report data to help them drive their business objectives.

13



We are organized into two business units comprised of the Insurance Risk Management division (IRM) and Unify Business Solutions division (UBS).

Critical Accounting Policies

The following discussion and analysis of the Companys financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The areas that require significant judgment are as follows.

Revenue Recognition

The Company generates revenue from software license sales and related services, including maintenance and support, and consulting services. The Company licenses its products to end user customers, independent software vendors (ISVs), international distributors and value added resellers (VARs).  The Companys contracts with ISVs, VARs and international distributors do not include special considerations such as rights of return, stock rotation, price protection, special acceptance or warranty provisions.  With the exception of its NavRisk product, the Company recognizes revenue for software license sales in accordance with Statement of Position 97-2, Software Revenue Recognition.  For the NavRisk product, the Company recognizes revenue for software licenses sales in accordance with Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts and
Accounting Research Bulletin (ARB) 45, Long-Term Construction Type Contracts.  The Company exercises judgment in connection with the determination of the amount of software and services revenue to be recognized in each accounting period.  The nature of each licensing arrangement determines how revenues and related costs are recognized.

With the exception of the NavRisk software application, the Companys products are generally sold with a perpetual license.  The Company sells the NavRisk software under both perpetual and term licenses.  Term licenses allow the customer to use the NavRisk software for a fixed period of time, generally 3 to 5 years, and at the conclusion of the term the customer must cease using the software or purchase a new license term.  The customer does not receive any additional software during the license term.  Under both perpetual and term licenses the customer can, at their discretion, elect to purchase related maintenance and support on an annual basis.

For software license arrangements that do not require significant modification or customization of the underlying software, revenue is recognized when the software product or service has been shipped or electronically delivered, the license fees are fixed and determinable, uncertainties regarding customer acceptance are resolved, collectibility is probable and persuasive evidence of an arrangement exists.

For arrangements of $10,000 or more a signed noncancelable license agreement is required for revenue recognition.  For arrangements that are less than $10,000 the Company considers a customer purchase order, a customer purchase requisition, or a sales quotation signed by an officer of the customer to be persuasive evidence that an arrangement exits such that revenue can be recognized.

For software license arrangements that do require significant modification or customization of the underlying software, revenue is recognized based on contract accounting under the provisions of Accounting Research Bulletin (ARB) 45, Long-Term Construction Type Contracts and Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.  This guidance is followed since contracts with customers purchasing the NavRisk application require significant configuration to the software and the configuration activities are essential to the functionality of the software.  The Company is using the completed-contract method for revenue recognition as it has limited experience determining the accuracy of progress-to-completion estimates for installation hours and project milestones.  Under the completed-contract method, revenue is recognized when the software
product or service has been shipped or electronically delivered, the license fees are fixed and determinable, uncertainties regarding customer acceptance are resolved, collectibility is probable and persuasive evidence of an arrangement exists.  Project costs incurred for contracts in progress are deferred and reflected on the Balance Sheet as Contracts in Progress.  As of January 31, 2006 Contracts in Progress was $116,000. When a contract is completed, revenue is recognized and deferred costs are expensed.  The Company anticipates it will switch to the percentage-of-completion method to recognize NavRisk revenue when it is capable of accurately establishing progress-to-completion estimates for the NavRisk contracts.

14



The Companys customer contracts include multi-element arrangements that include a delivered element (a software license) and undelivered elements (such as maintenance and support and/or consulting). The value allocated to the undelivered elements is unbundled from the delivered element based on vendor-specific objective evidence (VSOE) of the fair value of the maintenance and support and/or consulting, regardless of any separate prices stated within the contract. VSOE of fair value is defined as (i) the price charged when the same element is sold separately, or (ii) if the element has not yet been sold separately, the price for the element established by management having the relevant authority when it is probable that the price will not change before the introduction of the element into the marketplace.  The Company then allocates the remaining balance to the delivered element (a software license) regardless of any separate prices stated within the



contract using the residual method as the fair value of all undelivered elements is determinable.

We defer revenue for any undelivered elements, and recognize revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding customer acceptance are resolved, and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements.  If we cannot objectively determine the fair value of any undelivered element included in bundled software and service arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.

An assessment of the ability of the Companys customers to pay is another consideration that affects revenue recognition.  In some cases, the Company sells to undercapitalized customers.  In those circumstances, revenue recognition is deferred until cash is received, the customer has established a history of making timely payments or the customers financial condition has improved.  Furthermore, once revenue has been recognized, the Company evaluates the related accounts receivable balance at each period end for amounts that we believe may no longer be collectible.  This evaluation is largely done based on a review of the financial condition via credit agencies and historical experience with the customer.  Any deterioration in credit worthiness of a customer may impact the Companys evaluation of accounts receivable in any given period.

Revenue from support and maintenance activities, which consist of fees for ongoing support and unspecified product updates, are recognized ratably over the term of the maintenance contract, typically one year, and the associated costs are expensed as incurred.  Consulting service arrangements are performed on a best efforts basis and are generally billed under time-and-materials arrangements.  Revenues and expenses relating to providing consulting services are recognized as the services are performed.

Valuation of Other Investments

At January 31, 2006, we had $214,000 in long-term investments, which are accounted for under the cost method. We assess the valuation of long-lived assets whenever circumstances indicate that there is a decline in carrying value below cost that is other-than-temporary. Several factors can trigger an impairment review such as significant underperformance relative to expected historical or projected future operating results and significant negative industry or economic trends. In assessing potential impairment for such investments, we consider these factors as well as the forecasted financial performance. When such decline in value is deemed to be other-than-temporary, we recognize an impairment loss in the current period operating results to the extent of the decline.

Deferred Tax Asset Valuation Allowance

As of January 31, 2006, we have approximately $21 million of deferred tax assets related principally to net operating loss carry forwards, reserves and other accruals, deferred revenue, and foreign tax credits. A valuation allowance has been recorded to offset these deferred tax assets. The ability of the Company to ultimately realize its deferred tax assets will be contingent upon the Company achieving taxable income. There can be no assurance that this will occur in amounts sufficient to utilize the deferred tax assets. Should we determine that we would be able to realize the deferred tax assets in the future in excess of the recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.

15



Results of Operations

The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenue:

|                                      |  | Three   Months Ended   January 31, |       | Nine   Months Ended   January 31, | 
|------------------------------------- |  | ---------------------------------- | ----- | --------------------------------- | 
|                                      |  |                                    |       |                                   | 
|                                      |  | 2006                               |       | 2005                              | 
|                                      |  |                                    |       |                                   | 
|Revenues:                             |  |                                    |       |                                   | 
|Software   licenses                   |  |                                    | 42.5  | %                                 | 
|Services                              |  |                                    | 57.5  | %                                 | 
|                                      |  |                                    |       |                                   | 
|Total   revenues                      |  |                                    | 100.0 | %                                 | 
|                                      |  |                                    |       |                                   | 
|Cost of revenues:                     |  |                                    |       |                                   | 
|Software   licenses                   |  |                                    | 3.9   | %                                 | 
|Services                              |  |                                    | 26.2  | %                                 | 
|                                      |  |                                    |       |                                   | 
|Total   cost of revenues              |  |                                    | 30.1  | %                                 | 
|                                      |  |                                    |       |                                   | 
|Gross profit                          |  |                                    | 69.9  | %                                 | 
|                                      |  |                                    |       |                                   | 
|Operating expenses:                   |  |                                    |       |                                   | 
|Product   development                 |  |                                    | 31.2  | %                                 | 
|Selling,   general and administrative |  |                                    | 67.8  | %                                 | 
|                                      |  |                                    |       |                                   | 
|Total   operating expenses            |  |                                    | 99.0  | %                                 | 
|                                      |  |                                    |       |                                   | 
|Loss   from operations                |  |                                    | (29.1 | )%                                | 
|Other income, net                     |  |                                    | 0.6   | %                                 | 
|                                      |  |                                    |       |                                   | 
|Loss   before income taxes            |  |                                    | (28.5 | )%                                | 
|Provision for income taxes            |  |                                    | 0.0   | %                                 | 
|                                      |  |                                    |       |                                   | 
|Net   loss                            |  |                                    | (28.5 | )%                                | 
|                                      |  |                                    |       |                                   | 

Revenues

Total revenues for the fiscal 2006 quarter ended January 31, 2006 were $2.4 million compared to total revenues for the third quarter of fiscal 2005 which were $3.0 million. Software license revenue for the quarter ended January 31, 2006 was $1.0 million compared to $1.5 million for the same quarter of the prior year. In the third quarter of the fiscal 2006 the Company experienced a general softness in the market in all geographic regions resulting in a decrease in software license revenue compared to previous quarters. Contributing to the decrease in software license revenue was the fact that for the third quarter of fiscal 2006 the Company had only one high dollar software license contract included in revenue while in prior quarters the Company has generally had several high value software license contracts. Services revenue was $1.4 million for the quarter ended January 31, 2006 and $1.5 million for the same quarter of the prior year. Included in the
fiscal 2006 software license revenue was $0.3 million from NavRisk, the primary product of Unifys Insurance Risk Management division.

Total revenues for the nine months ended January 31, 2006 decreased by 8% to $7.8 million from the same period of the prior year when total revenues were $8.5 million. For the nine months ended January 31, 2006 software licenses were $3.4 million and services revenue was $4.4 million. For the same period in the prior year software licenses revenue was $3.9 million and services revenue was $4.6 million. For the nine months ended January 31, 2006 total revenue from NavRisk was $0.8 million which included $0.5 million in software license revenue and $0.3 million in services revenue.

Cost of Revenues

Cost of software licenses consists primarily of product packaging and production costs as well as the amortization of royalties and license fees paid for licensed technology. Cost of software licenses was $0.1 million for both the three months ended January 31, 2006 and the three months ended January 31, 2005. For the nine months ended January 31, 2006 the cost of software licenses was $0.4 million compared to $.3 million for the same period in the prior year. Cost of software licenses as a percent of software licenses revenues for the nine months ended January 31, 2006 was 10.3% as compared to 6.7% for the same period of fiscal 2005. The increase in the cost of software licenses was the result of an increase in amortization of purchased software licenses in fiscal year 2006. Costs associated with royalties and other direct production costs are expensed as incurred at the time of the sale and purchased technology from third parties is amortized ratably over their
expected useful life.

16



Cost of services consists primarily of employee, facilities and travel costs incurred in providing customer support under software maintenance contracts and consulting services as well as costs associated with providing customization and implementation services for NavRisk contracts. Total cost of services was $0.6 million for the third quarter of fiscal 2006 and $0.4 million for the third quarter of fiscal 2005. Total cost of services was $1.4 million for the nine months ended January 31, 2006 compared to $1.1 million for the same period of the prior year. Cost of services as a percent of services revenues was 31% for the nine months ended January 31, 2006 and 23% for the same period of fiscal 2005.  The increase in cost of services for the nine months ended January 31, 2006 was primarily the result of an increase in the number of personnel providing customization and implementation services in support of NavRisk contracts.  In the prior year the
Company did not have NavRisk as a product line until February 2005.

Cost of revenues for NavRisk is comprised of both costs associated with providing consulting services and costs for contracts that were completed in accordance with the completed contract method of accounting. Prior to contract completion, costs are deferred and reflected on the Balance Sheet as Contracts in Progress. When a contract is completed, revenue is recognized and deferred costs are expensed. For the three months ended January 31, 2006 costs of revenues for NavRisk was $0.3 million.

Product Development

Product development expenses consist primarily of employee and facilities costs incurred in the development and testing of new products and in the porting of new and existing products to additional hardware platforms and operating systems. Product development costs were $0.8 million in the third quarter of fiscal 2006 and $0.7 million for the same period in the prior year. Product development costs as a percentage of total revenues were 26% for the nine months ended January 31, 2006 compared to 25% in the same period of fiscal 2005.

Selling, General and Administrative

Selling, general and administrative (SG&A) expenses consist primarily of salaries and incentive pay, marketing programs, travel expenses, professional services, facilities expenses and bad debt expense or recoveries. SG&A expenses were $1.6 million for the third quarter of fiscal 2006 compared to $2.5 million for the third quarter of fiscal 2005. As a percentage of total revenue, SG&A expenses were 68% in the third quarter of fiscal 2006 and 85% in the third quarter of fiscal 2005. The $0.9 million reduction in SG&A was primarily the result of reductions in sales personnel and marketing expenses. The largest change was in sales expenses which decreased by $0.5 million in the third quarter of fiscal 2006 compared to the same period in fiscal 2005. The major components of SG&A for the third quarter of fiscal 2006 were sales expenses of $0.8 million, marketing expenses of $0.2 million and general and administrative expenses of
$0.6 million.

Provision for Income Taxes

No federal or state tax provisions were recorded in the three and nine month periods ended January 31, 2006, as the Company has significant net operating loss carryforwards.

Liquidity and Capital Resources

At January 31, 2006, the Company had cash and cash equivalents of $2.7 million compared to $3.7 million at April 30, 2005. Working capital was $0.4 million as of January 31, 2006 and $0.8 million as of April 30, 2005.

During the first quarter of fiscal 2006 the Company renewed its loan agreement with the Silicon Valley Bank. The agreement provides for a $1.0 million revolving line of credit and for term loans up to $250,000 for the purchase of qualifying equipment. As of January 31, 2006, the Company had $0.7 million outstanding under the line of credit and $0.2 million in available credit based upon eligible assets at that date. As of January 31, 2006, the company had a term loan balance of $0.1 million.

Cash flows used by operations were $1.5
million for the first nine months of fiscal 2006, compared to a usage of cash
for operations of $2.7 million for the first nine months of fiscal 2005. For the
nine months ended January 31, 2006, operating cash was provided by a decrease in
prepaid expenses of $0.1 million and an increase in deferred revenue of $0.2
million. Operating cash was used as a result of increases in accounts receivable
of $0.2 million and contracts in progress of $0.1 million and decreases in
accounts payable of $0.6 million, accrued compensation of $0.1 million and other
accrued liabilities of $0.4 million. For the nine months ended January 31, 2006
investing activities used cash of $0.1 million for the purchase of property and
equipment. Cash provided by financing activities in the first nine months of
fiscal 2006 was $0.7 million which was primarily the result of a net borrowings
on the Companys line of credit of $.7 million, proceeds from issuance of
common stock from stock option exercises and purchases of common stock under the
employee stock purchase plan of $0.1, offset by payments made on debt
obligations of $0.2 million. The Companys cash flow also reflects a
decrease of $0.1 million in the first nine months of fiscal 2006 as a result of
the effect of currency exchange rates related to international
operations.

17



A summary of certain contractual obligations as of January 31, 2006, is as follows (in thousands):

|                                     |  | Payments   Due by Period |      
|------------------------------------ |  | ------------------------ | -----
|                                     |  |                          |      
|Contractual Obligations              |  | Total                    |      
|                                     |  |                          |      
|Short-term borrowings                |  | $                        | 675  
|Long-Term Debt                       |  |                          | 130  
|Capital Lease Obligations            |  |                          | 12   
|Other Long-Term   Liabilities        |  |                          | 68   
|Operating Leases                     |  |                          | 2,135
|                                     |  |                          |      
|Total Contractual Cash   Obligations |  | $                        | 3,020
|                                     |  |                          |      

Volatility of Stock Price and General Risk Factors Affecting Quarterly Results

The Companys common stock price has been and is likely to continue to be subject to significant volatility. A variety of factors could cause the price of the Companys common stock to fluctuate, perhaps substantially, including: announcements of developments related to the Companys business; fluctuations in the Companys or its competitors operating results and order levels; general conditions in the computer industry or the worldwide economy; announcements of technological innovations; new products or product enhancements by the Company or its competitors; changes in financial estimates by securities analysts; developments in patent, copyright or other intellectual property rights; developments in the Companys relationships with its customers, distributors and suppliers; legal proceedings brought against the Company or its officers; the structure of acquisitions or potential acquisitions by the Company and the performance of any
companies acquired; and significant changes in the Companys senior management team. In addition, in recent years the stock market in general, and the market for shares of equity securities of many high technology companies in particular, have experienced extreme price fluctuations which have often been unrelated to the operating performance of those companies. Such fluctuations may adversely affect the market price of the Companys common stock.

The Companys quarterly operating results have varied significantly in the past, and the Company expects that its operating results are likely to vary significantly from time to time in the future. Such variations result from, among other factors, the following: the size and timing of significant orders and their fulfillment; demand for the Companys products; ability to sell new products; the number, timing and significance of product enhancements and new product announcements by the Company and its competitors; ability of the Company to attract and retain key employees; the Companys ability to integrate and manage acquisitions; seasonality; changes in pricing policies by the Company or its competitors; realignments of the Companys organizational structure; changes in the level of the Companys operating expenses; changes in the Companys sales incentive plans; budgeting cycles of the Companys customers; customer order
deferrals in anticipation of enhancements or new products offered by the Company or its competitors; product life cycles; product defects and other product quality problems; currency fluctuations; and general domestic and international economic and political conditions.

Due to the foregoing factors, quarterly revenues and operating results are difficult to forecast. Revenues are also difficult to forecast because the market for software continues to evolve and the Companys sales cycle, from initial evaluation to purchase and the provision of maintenance services, can be lengthy and vary substantially from customer to customer. Because the Company normally ships products within a short time after it receives an order, it typically does not have any material backlog. As a result, to achieve its quarterly revenue objectives, the Company is dependent upon obtaining orders in any given quarter for shipment in that quarter. Furthermore, because many customers place orders toward the end of a fiscal quarter, the Company generally recognizes a substantial portion of its license revenues at the end of a quarter. As the Companys expense levels are based in significant part on the Companys expectations as to future
revenues and are therefore relatively fixed in the short term, if revenue levels fall below expectations,  operating results are likely to be disproportionately adversely affected. The Company also expects that its operating results will be affected by seasonal trends, and that it may experience relatively weaker demand in fiscal quarters ended July 31 and October 31 as a result of reduced business activity in Europe during the summer months.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk. The
Companys exposure to market rate risk for changes in interest rates
relates primarily to its investment portfolio, which consists of cash
equivalents and short-term investments. Cash equivalents are highly liquid
investments with original maturities of three months or less and are stated at
cost. Cash equivalents are generally maintained in money market accounts which
have as their objective preservation of principle and which hold investments
with maturity dates of less than 90 days. The Company does not believe its
exposure to interest rate risk is material for cash and investments, which
totaled $2.7 million at January 31, 2006. Unify had no short-term
investments at January 31, 2006. The Company had $812,000 in short-term
borrowings and current portion of long-term debt and $5,000 in long-term debt at
January 31, 2006. Subsequent to quarter-end the Company made a payment of
$675,000 on its short-term borrowings.  The Company does not believe its
exposure to interest rate risk is material for debt.

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Unify does not use derivative financial
instruments in its short-term investment portfolio, and places its investments
with high quality issuers only and, by policy, limits the amount of credit
exposure to any one issuer. The Company is averse to principle loss and attempts
to ensure the safety of its invested funds by limiting default, market and
reinvestment risk.

Foreign Currency Exchange Rate Risk. As a global concern, the Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have an adverse impact on the Companys business, operating results and financial position. Historically, the Companys primary exposures have related to local currency denominated sales and expenses in Europe, Japan and Australia. For example, when the U.S. dollar strengthens against the major European currencies, it results in lower revenues and expenses recorded for those regions when translated into U.S. dollars.

Due to the substantial volatility of currency exchange rates, among other factors, the Company cannot predict the effect of exchange rate fluctuations on its future operating results. Although Unify takes into account changes in exchange rates over time in its pricing strategy, it does so only on an annual basis, resulting in substantial pricing exposure as a result of foreign exchange volatility during the period between annual pricing reviews. The Company also has currency exchange rate exposures on intercompany accounts receivable owed to the Company as a result of local currency sales of software licenses by the Companys international subsidiary in France. At January 31, 2006, the Company had the equivalent of $179,000 in such receivables denominated in Euros. The Company encourages prompt payment of these intercompany balances in order to minimize its exposure to currency fluctuations, but it engages in no hedging activities to reduce the risk of such
fluctuations. A hypothetical ten percent change in foreign currency rates would have an insignificant impact on the Companys business, operating results and financial position. The Company has not experienced material exchange losses on intercompany balances or as a result of exchange rate fluctuations in the past; however, due to the substantial volatility of currency exchange rates, among other factors, it cannot predict the effect of exchange rate fluctuations on its future business, operating results and financial position.

Item 4. Controls and Procedures

(a)   Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

(b)   Changes in Internal Controls. There have been no changes in our internal controls over financial reporting that occurred during the quarter ended January 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

19



UNIFY CORPORATION

PART II.     OTHER INFORMATION

Item 1.  Legal Proceedings

Litigation

The Company is subject to legal proceedings and claims that arise in the normal course of business. If such matters arise, the Company cannot assure that it would prevail in such matters, nor can it assure that any remedy could be reached on mutually agreeable terms, if at all. Due to the inherent uncertainties of litigation, were there any such matters, the Company would not be able to accurately predict their ultimate outcome. As of January 31, 2006, there were no current proceedings or litigation involving the Company that management believes would have a material adverse impact on its financial position, results of operations, or cash flows.

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Item 6.  Exhibits

|     | Exhibits                                                                                                                                      
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                               
|31.1 | Certification of Chief   Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|     |                                                                                                                                               
|31.2 | Certification of Chief   Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|     |                                                                                                                                               
|32.1 | Certification of Chief   Executive Officer under 18 U.S.C Section 1350 as adopted pursuant to   Section 906 of the Sarbanes-Oxley Act of 2002.
|     |                                                                                                                                               
|32.2 | Certification of Chief   Financial Officer under 18 U.S.C Section 1350 as adopted pursuant to Section 906 of   the Sarbanes-Oxley Act of 2002.

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UNIFY CORPORATIONSIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|Date: March 16, 2006 | Unify Corporation
|-------------------- | -----------------
|                     | (Registrant)     
|                     |                  
|                     | By:              
|                     |                  
|                     |                  
|                     |                  
|                     |                  

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